The majority of small business finance is raised from a bank. Use your bank for advice and guidance, they want to see you succeed.In this chapter, four things that really matter:Your bank should be the first port of call when you are looking for start-up finance.

Banks operate a wide variety of special lending schemes for the start-up business. In some cases, this will also be combined with ‘free’ banking for an initial term, usually ranging from 12 to 18 months.Quite apart from the financial side, your bank can also offer advice and guidance on a wide range of business concerns. These can include insurance and pension advice, through to help with taxation and other such legalities of running a business.

In most cases the business advice is offered free of charge so you should make the most of it. Banks want their business customers to succeed and you should really treat them as a partner. Talk to your bank on a regular basis and keep them informed.

If for any reason your business is running into problems then seek their help at an early stage. Do not leave it so late that nothing can be done.

Is This You?

I just need an overdraft for all my funding, it keeps things simpler that way. • I don’t want to borrow long-term, I should make enough in the short-term to pay off all the funding. • I don’t understand why the bank is charging me twice for the same finance, are they overcharging me? • I can’t offer any security, will that stop me raising money?

Understanding How An Overdraft Works

An overdraft is there to provide short-term working capital. Remember those key words – short-term. Overdrafts are available effectively to bridge the gap between money that is due from your customers and money that you need to pay to your suppliers. An overdraft should never be used to fund the purchase of assets unless full repayment is to be made in the short-term.

Unfortunately this critical rule is often ignored by business owners. It is vitally important that you obtain the right type of funding for your business.

• Long-term funding for long-term investments such as the purchase of fixed assets.

 

• Short-term funding for short-term requirements such as money due from debtors.

 

A bank overdraft works in a very simple way. An overall limit on the overdraft amount on your account is agreed between you and the bank. You are then free to draw money up to that amount, which is then repaid when you receive funds from your customers. In banking terms it is defined as an ‘in and out’ facility. Funds flow in and out on a regular basis to fund your working capital requirement.

Working Capital

Working capital within a business is the amount of money that is held in short-term assets such as debtors and stock against the amount owed to short-term liabilities such as trade creditors. In an ideal situation, your account should swing on a regular basis from being overdrawn to being back in credit. This would mean that your short-term assets are being quickly converted into cash which is paid into the account.

This demonstrates the requirement to keep tight control of your working capital. You must always have sufficient funds to meet your liabilities as they fall due. The overdraft is there to help you in this respect but you must also retain tight control over the facility. It is essential that you do not exceed the overdraft limit without the bank’s permission. Quite apart from the penalty interest that will be imposed, in some cases equating to over 30% per annum, the bank may refuse to pay cheques or other items such as direct debits.

Once this happens you have effectively lost control. No longer are you able to use the overdraft freely to pay your creditors. It is now the bank that is deciding what will be paid. You can be sure that their interest and charges will come out first.*